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New Product Line IRS Supermarket
Citation preview
Presented by
Richard L. Randall, Esq.Chairman & CEO, National Network
of Estate Planning Attorneys
A New Product Line at the IRS Supermarket: Shopping During Estate Tax
Purgatory
Estate Planning Overview
Most Estate PlansJust Don’t Work!
Estate Planning Overview
Definition of Estate Planning
I Want to Control My Property While I’m Alive and Well
Plan for Me and My Loved Ones if I Become Disabled
Estate Planning Overview
Definition of Estate Planning
Then Give What I Have• To Whom I Want• When I Want• The Way I Want
All While Assuring My Wisdom is Transferred Along with the Rest of My Wealth
SAVE TAXES
EXPAND WEALTH
PRESERVEWEALTH
FAMILY
ME
The LifeSpan™ Planning Pyramid
TM & © LifeSpan, LLC 2002 - 2009. Use by National Network members by express permission and under license granted by LifeSpan, LLC. Revised 4/2007 ™
™1. DEVELOP your plan with counselling-oriented planning partners
2. C
OM
MIT
you
rsel
f and
you
r fa
mily
to a
form
al
cont
inui
ng m
aint
enan
ce a
nd e
duca
tion
pro
gram
3. SEC
UR
E appropriate assistance to assure your w
isdom
is transferred along with the rest of your w
ealth
Estate Planning Overview
Three Step Strategy™• DEVELOP Your Plan with Counselling Oriented Planning Partners• COMMIT Yourself and Your Family to a
Formal Continuing Maintenance and
Education Program • SECURE Appropriate Assistance for You and Your Family to Transfer Your Wisdom Along With the Rest of Your Wealth
Estate Planning Overview
Personal Planning Goals
• Catastrophic Illness Protection• Remarriage Protection• Creditor Protection• Divorce Protection• Values Promotion
Estate Planning Overview
Three Step Strategy™• DEVELOP Your Plan with Counselling Oriented Planning Partners• COMMIT Yourself and Your Family to a
Formal Continuing Maintenance and
Education Program • SECURE Appropriate Assistance for You and Your Family to Transfer Your Wisdom Along With the Rest of Your Wealth
Estate Planning Overview
Three Types of Change An Estate Plan Faces
• Changes in Your Personal Situation
• Personal• Financial
Estate Planning Overview
Three Types of Change An Estate Plan Faces
• Changes in the Legal Environment
• Tax• Non-Tax (Personal Protections)
Estate Planning Overview
Three Types of Change An Estate Plan Faces
• Changes in Your Attorney’s Experience• Changes in Your OWN Experience
• Static vs. Continuous Improvement?
• Add Earned and Learned Wisdom!
Estate Planning Overview
Three Step Strategy™• DEVELOP Your Plan with Counselling Oriented Planning Partners• COMMIT Yourself and Your Family to a
Continuing Maintenance and Education
Program • SECURE Appropriate Assistance for You and Your Family to Transfer Your Wisdom Along With the Rest of Your Wealth
Results of Planning Without TheThree Step Strategy™ Approach
• Reduced Initial Planning Options
• Outdated PlansTechnicalPersonal
• Little EducationFor YourselfFor Your Family
Estate Planning Overview
Three Step Strategy™• DEVELOP Your Plan with Counselling Oriented Planning Partners• COMMIT Yourself and Your Family to a
Continuing Maintenance and Education
Program • SECURE Appropriate Assistance for You and Your Family to Transfer Your Wisdom Along With the Rest of Your Wealth
Estate Planning Overview
EVERYTHING IN ESTATE PLANNING COMES DOWN TO TITLE!
• Tax Savings
• Personal Protections• Catastrophic Illness Protection• Catastrophic Creditor Protection• Remarriage Protection• Divorce Protection
Presented by
Richard L. Randall, Esq.Chairman & CEO, National Network
of Estate Planning Attorneys
The New Estate Planning Landscape (Guiding Clients Through Estate Planning
Purgatory)
Bush Tax Act (EGTRRA)
•Gradually Increased Exemption Amounts (from $675,000 to $3.5 Million in 2009)
•Decreased Estate Tax Rates (Down to Top Rate of 45%)
•Eliminated Estate &GST Taxes in 2010
•“Sunset” Provision (“Byrd Rule”) Reinstates Previous System in 2011 Unless Congress Acts
Extension of EGTRRA?
•H.R. 4154 Passed December 3, 2009 (with NO Republican Votes)
•Republicans Wanted $5 Million Exemption and Top Rate of 35%
•Senate Failed to Pass Any Law and Denied Two Month Extension (Same Republican Proposal, but Including “Portability” )
•“Byrd Rule” Requires 60 Vote Majority & There’s No Consensus!
Indeed, Senate Finance Committee Chairman
Max Baucus says there’s “Massive, Massive
Confusion”!
What Happens In 2011 If No Change?
•$1 Million Federal Estate Tax Exemption
•Estate and Gift Tax Unified Again
•GST Exemption Will Be Inflation Adjusted $1 Million (approximately $1,340,000)
•Top Rates Revert to 55% (With 60% “Bump” for Estates Over $10 Million)
Three Potential Scenarios
•Congress Acts This Year and Law Applies Retroactively
•Congress Acts and Law Does NOT apply Retroactively (or Retroactivity is held Unconstitutional)
•Congress Does Not Act
Three Possible Results
•2009 Provisions Extended ($3.5 Million Exemption and 45% Rate)
•$5 Million Exemption and 35% Rate
•$1 Million Exemption and 55% Rate
So What’s the Law Now?
• NO Federal Estate Tax
• NO Generation Skipping Tax (GST)
• Gift Tax at 35% Rate
• Carryover Basis Regime Becomes Effective
• $1.3 Million Step-up Allocation
• Additional Step-up Allocation for $3 Million for Assets Transferred to Spouse, Either Outright or to a Q-TIP Trust
And, Planning Uncertainty “Rules!”
•Constitutionality of Retroactive Provision?
•Interpretation of Legal Documents
•Interpretation of “Repeal” Language
Constitutionality of Retroactive Application of Tax Legislation
•Good Arguments on Each Side
•Retroactive Application Has Been Upheld, but Rulings Can Be Distinguished
•Very Difficult to Predict Result
And, Planning Uncertainty “Rules!”
•Constitutionality of Retroactive Provision?
•Interpretation of Legal Documents
•Interpretation of “Repeal” Language
Federal Estate Tax Reduction
Trustee Instructions:
Transfer up to Exemption Equivalent to Family Trust, Put Any Excess in Marital Trust
Marital
Excess 1st $3,500,000(2009)
Family
Federal Income Tax Reduction
Trustee Instructions:
Transfer all Property to Family Trust, Put Excess Appreciated Assets in Marital Trust
Marital
Up to $3,000,00 of Appreciated Assets
All Property(1st $1,300,000
Stepped Up-2010)
Family
Income Tax Basis Analysis
BUY DIE SELL
2009 10 100 100
2010* 10 100 10
2011 10 100 100
*$1.3 MM Basis Adjustment; Additional $3MM Spousal Basis Adjustment
Federal Estate Tax Reduction
Trustee Instructions:
Transfer up to Exemption Equivalent to Family Trust, Put Any Excess in Marital Trust
Marital
Excess 1st $1,000,000(2011)
Family
And, Planning Uncertainty “Rules!”
•Constitutionality of Retroactive Provision
•Interpretation of Legal Documents
•Interpretation of “Repeal” Language
“As If Never Enacted”
•“Blended Families”•Charitable Bequests•Generation-Skipping Trusts•“De-Coupled” State Death Taxes
Note: These Involve Percentages and Formula Wording
Prioritizing Client Situations for Review
What Can Financial Advisors Do?
•Proactively Identify Clients with Estate Planning Documents Executed Prior to 2001
•Proactively Verify Estate Planning Document Language For More Recent Plans
•Proactively Identify Clients Who Have Pursued Generation-Skipping Planning
What Can Financial Advisors Do?
•Proactively Identify Clients With Appreciated Assets and Assess Basis Information Situation With Them-Begin With Clients That Have Known Health Issues
•Proactively Identify Clients Affected By Potential Reduction to $1 Million Exemption
•Encourage Clients to Document Their Intent
The Author Would Like to Acknowledge the Assistance of:• James W. Collins, Legal Support Director for the National Network of Estate Planning Attorneys•Members of the National Network who supplied various material and insights•Leading Estate Planning Attorneys for Their Insights in Articles, on Teleconferences and at the Heckerling Institute
Acknowledgements
Presented by
Richard L. Randall, Esq.Chairman & CEO, National Network
of Estate Planning Attorneys
A New Product Line at the IRS Supermarket: Shopping During Estate Tax
Purgatory
Estate Planning Overview
Estate Planning Challenges
• Mental Disability
• Asset Transfer Upon Death
• Taxation
• Personal Planning Goals
Federal Estate Tax Reduction
Key Tax Savings Provisions
Unlimited Marital Deduction
The “Exemption Equivalent”
Estate Tax “Purgatory” Planning
Bush Tax Act (EGTRRA)
•Gradually Increased Exemption Amounts (from $675,000 to $3.5 Million in 2009)
•Decreased Estate Tax Rates (Down to Top Rate of 45%)
•Eliminated Estate & GST Taxes in 2010
•“Sunset” Provision (“Byrd Rule”) Reinstates Previous System in 2011 Unless Congress Acts
Estate Tax “Purgatory” Planning
Three Potential Scenarios
•Congress Acts This Year and Law Applies Retroactively
•Congress Acts and Law Does NOT apply Retroactively (or Retroactivity is held Unconstitutional)
•Congress Does Not Act
Estate Tax “Purgatory” Planning
Three Most Likely Results
•2009 Provisions Extended ($3.5 Million Exemption and 45% Rate)
•$5 Million Exemption and 35% Rate
•$1 Million Exemption and 55% Rate
Estate Tax “Purgatory” Planning
Requires an “If-Then” Approach IF No Estate Tax is in Effect (as in 2010),
Your Plan Must Provide for Maximizing Federal INCOME Tax (Capital Gains) Reduction
THEN Retains Traditional Estate Tax Reduction Approach IF Federal Estate Tax is Reinstated (No Later Than 2011?)
Federal Estate Tax Reduction
Trip to the IRS Supermarket
Federal Estate Tax Reduction
Property in The Supermarket Is Subject to Federal Estate Tax
Property out in The Parking Lot Is Not Subject to Federal Estate Tax
Federal Estate Tax Reduction
Family Trust
also called: B Trust Credit Shelter Trust By Pass Trust
FamilyTrust
Trustee Instructions:
Split Trusts Into Two Sub-Trusts
Family
Federal Estate Tax Reduction
Marital
Survivor May Be Trustee and Beneficiary of Both!
Federal Estate Tax Reduction
Trustee Instructions:
Transfer up to Exemption Equivalent to Family Trust, Put Any Excess in Marital Trust
Marital
Excess 1st $3,500,000(2009)
Family
Federal Income Tax Reduction
Trustee Instructions:
Transfer all Property to Family Trust, Put Excess Appreciated Assets in Marital Trust
Marital
Up to $3,000,000 of Appreciation on Assets
All Property(1st $1,300,000
Stepped Up-2010)
Family
Federal Estate Tax Reduction
Trustee Instructions:
Transfer up to Exemption Equivalent to Family Trust, Put Any Excess in Marital Trust
Marital
Excess 1st $1,000,000(2011)
Family
Federal Estate Tax Reduction Marital Trust
Trustee Instructions:
Income to Spouse
Marital
Federal Estate Tax ReductionMarital Trust
Trustee Instructions:
Principal Full Control Full Use; Limited
Control on Death Full Use Marital
Limited Power of Appointment
The “Hit Parade”
Kid Hits the School Bus School Bus Hits the Kid Marriage Hits the Rocks Kid Hits the Bottle Kid Hits the Books Kid Hits the Lottery Kid Hits the Skids
Federal Estate Tax ReturnFamily Trust
Trustee Instructions:
Income to Spouse Mandatory Discretionary
Family
Federal Estate Tax ReductionFamily Trust
Trustee Instructions:
Principal For “Needs” Health Education Maintenance Support
Family
Federal Estate Tax Reduction
The “Rule of 72”Dividing 72 by the rate of return on your investment roughly equals the number of years it takes to double
your account balance.
Federal Estate Tax Reduction
Effect of Growth
Excess
To LaterBeneficiaries But
Included in Survivor’s Estate
1st $3,500,000 (2009)
$14,000,000To Later Beneficiaries
WITHOUT Federal Estate Tax
FamilyMarital
Federal Income Tax Reduction
Effect of Growth
$3,000,000
To Later Beneficiaries WITHOUT Federal Income Tax But Could Be
Later Included in Survivor’s Estate
1st $1,300,000
To Later Beneficiaries WITHOUT Federal Estate Tax or Income (Capital Gains) Tax
FamilyMarital
Federal Estate Tax Reduction
Trustee Instructions:
Transfer up to Exemption Equivalent to Family Trust, Put Any Excess in Marital Trust
Marital
Excess 1st $1,000,000(2011)
Family
Estate Tax “Purgatory” Planning
Requires an “If-Then” Approach IF No Estate Tax is in Effect (as in 2010),
Your Plan Must Provide for Maximizing Federal INCOME Tax (Capital Gains) Reduction
THEN Retains Traditional Estate Tax Reduction Approach IF Federal Estate Tax is Reinstated (No Later Than 2011?)
Federal Estate Tax Reduction
Tax Savings Determined By:
Applicable Exclusion Amount
(Determined by Congress)
Funding of Family Trust
Federal Income Tax Reduction
Tax Savings Determined By:
Applicable Basis Allocation Amount (Determined by Congress)
Funding of Family Trust Funding of Marital Trust
Federal Estate Tax Reduction
Available
Individual Name Assets Living Trust Assets Beneficiary Designations
Payable to Trust
Not Available
Joint Assets
Beneficiary Designations Payable to Individuals
Funding The Family Trust
Federal Income Tax Reduction
Available
Individual Name Assets Living Trust Assets Beneficiary Designations
Payable to Trust
Not Available
Joint Assets
Beneficiary Designations Payable to Individuals
Funding The Family and Marital Trusts
Conclusion/Recommendation
Pursue the Three Step Strategy™• DEVELOP Your Plan with Counselling Oriented Planning Partners• COMMIT Yourself and Your Family to a
Formal Continuing Maintenance and
Education Program • SECURE Appropriate Assistance for You and Your Family to Transfer Your Wisdom Along With the Rest of Your Wealth